This Sounds Like a Dumb Idea: Cutting the 401(K) Deduction

May 2, 2012

Okay, I know the NY Post is usually alarmist but I have heard about this idea before. The idea supposedly being kicked around is to limit the amount employees and employers can put towards the employee’s 401(k) to a maximum of $20,000 or 20% of income, whichever is smaller. The current amount is a maximum of $50,000. I hope this does not happen as it sounds like a dumb idea to me.

Why?

Shouldn’t we be ENCOURAGING people to save towards retirement? The new rule would affect my wife’s 401(k) drastically at a time when we really should be saving as much as we can.

It always makes me laugh when I hear “experts” talk about how much a certain action will bring in tax revenues. Things NEVER work the way politicians plan.

It’s not clear from the article what happens to the accounts at retirement as to whether or not the withdrawals would be taxed.

JLP

65 responses to This Sounds Like a Dumb Idea: Cutting the 401(K) Deduction

> If you purchase goods from a supplier that didnâ€™t
> pay the VAT, then you get no refund on your VAT.

Uh, no.

The purchaser does not know whether the seller paid the VAT or not. The purchaser only knows what HE paid, and deducts that amount from what he collects on his sales before remitting it to the government.

Sorry, but no. The purchaser pays the seller for the goods, plus the VAT. It is the _seller_ that is supposed to forward the VAT taxes to the government (minus his VAT on his incoming goods). If the seller did not forward the taxes to the government, then the purchaser (if also a supplier in the chain, otherwise they are a consumer) is refused his _refund_ on VAT paid, because in fact, the VAT was not paid.

Clear as mud?

The VAT has a pay first, refund later model. The model is elegant for two main reasons: businesses can be both suppliers AND consumers. For any goods they purchase and not resale, they are the consumer and eat the total value of the VAT sales tax (exactly like a private consumer). This prevents the loophole where we, today, allow companies to completely writeoff consumption purchases (like private jets).

Secondly, if you are in the supply chain, it is in your interest to only deal with honest business that actually remit the VAT (like I mentioned) so you can get the VAT refund as the goods roll through the supply chain.

It is the governments job to double check that the VAT was actually paid by the tax ID that you _claim_ you paid…if the numbers dont add up, the chain is broken and you eat the full cost of the VAT (because your refund is denied) – effectively making you a consumer since it knocks _you_ out of the supply chain.

If any cheating goes on, the government gets at least partial taxes on the goods in the economy. Whereas on a strictly sales tax model (like we have in most states), a cheating retailer can simply not remit the collected sales taxes, the government gets Nothing (not a single penny), enforcement is d@mn near impossible, and no one is the wiser until after an audit.

Who says you aren’t the cheat trying to extract money from The Revenue, as people on the other side of the pond call their Treasury. There are known VAT scams where people file bogus VAT refunds on their fictitious outgoing goods. Google it.

Stay on target, BG. We’re only talking about how it works. A company submits the receipts detailing how much VAT it paid on purchases of goods going into manufacture, and that amount is deducted from the VAT owed on their sales.

The government does not require companies to pay the entire VAT on its sales and then refund some of the money as that company’s suppliers send in their VAT money. Do you really think the government tracks the purchases, and only refunds the tax for those purchases when the VAT comes in for it?

Jack) The system is “Buyer Beware”, and the buyers of goods are extremely encouraged to first validate the VAT ID number of the seller before paying the VAT to the seller. There are governmental websites dedicated to validating seller’s VAT ID numbers.

If a seller’s VAT ID number is not valid, then the buyer can refuse to pay the VAT and the seller has 90 days to obtain a valid VAT ID number and invoice the purchaser for the unpaid VAT.

If you are dumb and pay a ‘cheating’ seller the VAT before validating their ID number: then it is the BUYER that is screwed and the government will come after the buyer for “cheating the public revenues” for filing fraudulent VAT refund paperwork.

I should mention that sellers who ‘zero-rate’, meaning they are exporting goods which are sold VAT free (typically to a business in another VAT country), are strongly encouraged to validate the VAT ID number of the purchaser.

Either way: it is the party that wants to claim a REFUND of the VAT (by deducting the amount of VAT already paid on the incoming goods), to have good documentation proving that the VAT was, in fact, actually paid.

So: businesses in the middle (or end) of a supply chain have a strong incentive to only deal with legit VAT-paying suppliers.

Businesses that export out of the country have a strong incentive to “vet” their customers to ensure that the customer is truly allowed to purchase the goods VAT free.

Let’s say the VAT is 10%. If a company pays Â£100 in VAT on a Â£1000 purchase, then sells that item for Â£1200, it does not remit Â£120 to the government and then submit the receipt to get the government to REFUND the Â£100. Rather, the company DEDUCTS the Â£100 it already paid, and remits Â£20.

If the government conducts an audit and it turns out that the receipt is invalid (because the seller was a fraud), then the deduction is rejected and the purchaser must remit the missing Â£100.

Same difference. Taxes were already paid on the incoming goods. If you want that money refunded, then the new seller must have proper paperwork showing they did their due diligence vetting that the supplier was not a cheat. Without that proof, you cannot deduct incoming VAT paid when remitting the buyers VAT paid.

Anyhow my point is clear: the system is self enforcing because every business in the supply chain has a strong incentive to ensure everyone else they deal with is honest.